China's 2017 industrial profits post fastest growth in six years

BEIJING (Reuters) - Profits for China’s industrial firms rose at the slowest pace in a year in December as Beijing’s anti-smog curbs hit activity, but profits clocked their fastest annual rise in six years as cost cutting and a construction boom helped businesses in 2017.

For the full year, profits surged 21.0 percent to 7.519 trillion yuan ($1.19 trillion), the fastest pace since the 25.4 percent expansion in 2011, and accelerating from 2016’s 8.5 percent increase, data from the National Bureau of Statistics (NBS) showed on Friday.

The fast growth in 2017 profits is largely due to the deepening of cuts in over-capacity and costs reduction efforts, He Ping of the statistics bureau said in a statement along with the data release.

While China’s efforts to reduce pollution and credit risks in the economy have hit some segments of industry, analysts expect businesses will manage a transition to new requirements for cleaner production and leaner operations without taking major blows to their profits.

Profits in December rose 10.8 percent in December from a year ago to 824.16 billion yuan, their weakest expansion in 12 months and slowing from November’s 14.9 percent gain.

China’s producer prices rose at their slowest pace in 13 months in December, as the government’s war against winter smog dented factory demand for raw materials in the month.

While the industrial sector has enjoyed a year-long construction boom, a government-led battle to clean polluted air has forced steel makers in Northeastern China to curtail output although factories elsewhere may have ramped up production to gain market share.

China’s Ministry of Environmental Protection published a notice this month, saying it would impose “special emissions restrictions” on enterprises in major industrial sectors in northern parts later this year.

Despite some traders replenishing steel stockpiles ahead of the Lunar New Year holiday, appetite has diminished due to concerns about demand.

Gains for the year were concentrated in the upstream industries like coal and steel production while downstream companies, such as manufacturers, were able to offset higher input costs by keeping their labor costs stable, analysts say.

“Profits this year won’t look too bad as producer prices are expected to rise modestly,” said Zhang Yi, chief economist at Capital Securities in Beijing, adding that he expects industrial profits to grow over 10 percent this year.

“Modest price gains will give room for firms to deleverage.”

At the end of December, industrial firms’ liabilities were 5.7 percent higher than a year earlier, slowing from the 6.3 percent increase at the end of November.

The ratio of liabilities to assets at industrial firms ticked down to 55.5 percent at the end of December, compared to 55.8 percent in November, indicating some progress in China’s efforts to deleverage the corporate sector.

The earnings data by sector, however, highlights the uneven nature of profit growth.

Mining industry profits rose 261.6 percent from a year earlier in 2017, reversing a 27.5 percent loss in 2016, while growth of manufacturing profits quickened to 18.2 percent.

Profits at China’s state-owned industrial firms rose 45.1 percent in 2017 from the year before, slowing from a 46.2 percent increase in January-November.

China posted its 2017 gross domestic product of 6.9 percent growth this month, logging its first annual acceleration in growth in seven years, defying concerns that government’s intensifying crackdown on property market and credit would hurt expansion.